Core inflation is expected to rise in the consumer price index report set for release Wednesday, even as falling gas prices are forecast to bring down overall inflation.
Core inflation, referring to the pace of inflation when the volatile categories of food and energy are stripped out, is thought to be the more forward-looking gauge than the headline inflation number.
Wednesday’s CPI report is highly anticipated for signs of whether the Federal Reserve‘s aggressive monetary tightening cycle is succeeding in bringing down prices. Annual inflation ticked up to a blistering 9.1% in June, and the consensus is that the headline figure will decline to an explosive 8.7%.
The likely decline in headline inflation will be largely led by declining gas prices, which, while they remain higher than a year ago, have decreased precipitously since June. The average price for a gallon of gas nationwide is now $4.03, according to AAA. That is down by more than a dollar in a matter of just a couple of months.
Core inflation, however, is expected to tick up to 6.1% from 5.9% on an annual basis and accelerate from 0.5% to 0.7% from the month before.
INFLATION EXPECTATIONS TUMBLE AS FED GEARS UP FOR MORE RATE HIKES
Greg McBride, the chief financial analyst at Bankrate, said that while the declining gas and other commodity prices bode well for the July CPI report, he is focused on the core numbers.
“While the headline number may look a lot better, the true gauge of whether inflation has peaked is what happens with core prices that exclude the volatile food and energy prices movements,” he said.
“To relieve the pressure on household budgets and boost the otherwise sour mood of consumers, we need to see a broad-based, significant, and sustained easing of pricing pressures for the remainder of 2022 and well into 2023,” McBride said. “Will that happen? Reality may fall short of those lofty hopes.”
One factor of the core inflation that might put upward pressure on July’s core CPI is housing costs. While the housing market has been cooling, shelter costs and rents typically lag behind increases in housing prices.
Existing-home sales declined by 5.4% in June to a seasonally adjusted annual rate of 5.12 million, according to a report by the National Association of Realtors released Wednesday. Sales were down a hefty 14.2% from a year ago.
Despite that, the NAR said the median existing-home sales price rose to $416,000, up 13.4% for the 12 months ending in June. The hike marks 124 consecutive months of year-over-year price increases, the longest recorded streak.
“Falling housing affordability continues to take a toll on potential home buyers,” said NAR Chief Economist Lawrence Yun when the report was released. “Both mortgage rates and home prices have risen too sharply in a short span of time.”
The average one-bedroom rental cost is now about $1,700, according to data compiled by Rent.com. One- and two-bedroom rentals are up 25.3% and 26.5%, respectively, on an annual basis.
Wednesday’s CPI report comes against the backdrop of the Fed aggressively jacking up interest rates.
In July, following a two-day meeting, central bank officials announced that the Fed would increase its interest rate target by three-quarters of a percentage point. The central bank usually hikes rates by just a quarter of a percentage point, so the move was analogous to three concurrent rate hikes, which shows just how eagerly the Fed is trying to tame inflation.
Last month’s rate hike came after the Fed hiked rates by the same massive margin in June and conducted two other rate increases in March and May.
There is a trade-off for hiking rates so aggressively, though, and that is the possibility of a recession.
There are some key signs that lend credence to the idea that the country is on the brink of, or is already in, a recession.
U.S. gross domestic product fell at a 0.9% annualized rate in the second quarter, according to a preliminary estimate from the Bureau of Economic Analysis. The numbers come after negative 1.6% GDP growth in the first quarter. Many economists have traditionally regarded two quarters of negative GDP growth as recessionary.
Yet other indicators suggest the economy is far from a recession. The main one is the shockingly strong labor market that has shown unexpected resiliency despite the historic round of rate increases.
The economy once again defied expectations and added 528,000 jobs in July. The unemployment rate also unexpectedly fell to 3.5%, matching the ultra-low level it was at prior to the pandemic.
The good jobs report will give the Fed more confidence that the economy can withstand the continued aggressive rate hikes.
While many economists had expected a half-point rate hike following the central bank’s September meeting, the strong jobs report for July bolsters arguments that another 75-basis-point hike could be on the table. If Wednesday’s CPI reading comes in hotter than expected, that could place even more pressure on the Fed to remain hawkish.
There has also recently been some good news on the inflation front.
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The monthly Survey of Consumer Expectations for July released by the Federal Reserve Bank of New York Monday found “substantial declines” in short, medium, and long-term inflation expectations. One-year inflation expectations plunged from 6.8% to 6.2%, and three-year-ahead expectations dropped from 3.6% to 3.2%.
While those numbers are well above the Fed’s goal of sustained 2% inflation, the declines are notable because they show that the central bank is succeeding in driving down consumer perceptions of price hikes to come.
